Beijing office market sees continuous rental adjustment

Beijing: 9 July 2024 – “Since the beginning of this year, Beijing has sustained economic recovery trend. The sustained efforts of policies are gradually showing results. Despite overall subdued office demand, the continuous adjustment of rents is expected to have a positive impact on the market activity in the second half of the year. Beijing’s prime retail market has maintained a steady recovery, creating opportunities for tenant-mix adjustments,” said Rayman Zhang, Managing Director for North China, JLL.

In the second quarter, the Grade A office market demand remained under pressure, with major tenants' relocations exacerbating vacancy pressure in certain submarkets. In the investment market, real estate developers have accelerated the disposal of core assets, with domestic buyers as the absolute mainstay. In the prime retail market, although new project supply has increased, robust demand has supported a steady recovery in rents. The industrial market welcomed three new project deliveries this quarter. While rents have continued their downward trend, low-price strategies have significantly boosted leasing activity during this period. The upscale hotel market in 2024 H1 has performed positively compared to last year. The high-end residential market faces sell-through pressure, with the trend of “exchanging volume for price” further manifesting. 
 

Landlords under rising pressures accelerated the pace of renewals. Although the recent decline in rents has led some tenants to realize flight-to-quality in 2Q24, the stimulus to overall demand from the low-rent environment was limited. Tenants remained cautious of costs regarding relocation, thus a notable proportion of tenants chose to renew leases rather than seek new spaces. The industry distribution of leasing transactions was more diversified. TMT industry tenants contributed one-quarter of the total leasing volume. Leasing activities in the Zhongguancun submarket continued to pick up since the end of 2023. Besides the traditional IT & software companies, gaming and AI companies also showed notable leasing momentum in 2Q24.

The overall vacancy rate edged up 0.3 ppts to 12.1% in 2Q24. However, the vacancy rate in the Wangjing submarket rose significantly, due to Alibaba fully vacating its office space in the Alibaba Centre Building B to relocate to its campus in the suburb. The entire project is now available for lease, amplifying supply pressure in that submarket. Although some vacant spaces, especially in the Zhongguancun and CBD submarkets, were absorbed, landlords are still under pressure in the slow environment. Companies continued to downsize and surrender their space.

The downward trend of Grade A overall rents continued, reporting -3.3% q-o-q growth and -12.7% y-o-y growth in 2Q24. Given a market environment of weak demand, other than continuing to reduce rents to attract new demand, landlords have started to offer significant rent discounts on lease renewals to retain existing tenants. “Leasing demand will take more time to pick up and rental adjustment period is expected to continue through 2024,” said Michael Zhang, Senior Director of Office Leasing Advisory for JLL Beijing. “A large wave of lease expirations is anticipated in 2024 and will likely bring new demand to the market. However, most landlords are expected to become more flexible on renewals than ever and tenants will be more cautious in making major relocation decisions amid the slow recovery of the economy. The proportion of expiring tenants choosing to renew leases instead of relocation will increase significantly in 2024.” Given the weak demand, landlords will provide more aggressive strategies to attract and retain tenants. Grade A office rents are expected to continue to decline at a rapid pace in 2024. 

Developers are expediting the disposal of core assets to address market cycle adjustments. Sino-Ocean Group announced it will transfer its 64.79% stake in the Indigo Phase 2 commercial complex project to China Life and Swire Properties for a total transaction value of approximately RMB 4 billion. The Wangjing project, comprising a mix of a shopping mall, office buildings, and a hotel, is currently under construction and set for phased launches in 2025-2026.

This quarter, Beijing’s investment market has been dominated by smaller-scale transactions, with domestic investors taking the lead. The 39,500 sqm Meiquangong Hotel, located along the West Fourth Ring Road, was auctioned for around RMB 700 million. Quality retail assets with stable operating performance are currently investor focuses. “The Beijing market is relatively calm at the moment, but we have observed an increase in asset disposals,” said Jessie Xu, Operations Director of China and Head of Capital Markets North China, JLL. “The listing of quality assets will create opportunities for buyers to acquire at favorable prices.”
 

_{Note: Prime Retail refers to the Urban market. *New Supply includes the Suburban market.}

Rising demand from the F&B and fashion sectors creates opportunities for tenant-mix adjustments. Market demand has remained active, with increased new leasing inquiries from the F&B, fashion and lifestyle sectors. Specifically, affordable retail brands from these sectors that generate high-frequency consumption have been actively expanding, bringing new opportunities for tenant-mix adjustments at leading projects. The overall active demand has significantly benefited the recently opened projects in the Suburban market, helping them effectively destock their vacancies. The net absorption in the Suburban market reached 249,300 sqm in the quarter, and the 1H24 figure is approaching the full-year 2023 level.

Due to steady demand, supply peak only has temporary effects on the market, with supply-demand landscape remaining balanced. In the second quarter, a total of three new projects with a total area of 385,000 sqm entered the market, setting a new high for single-quarter supply in recent years. The large-scale new projects have not yet achieved full occupancy, leading to a 1.4-ppt increase in the Suburban vacancy rate to 7.8%. However, as reflected by the destocking pace of the new projects over the past several quarters, the robust demand momentum has allowed the market to remain balanced, and the overall vacancy rate has not been continually affected.

Rents have kept increasing for four consecutive quarters, but still lag behind compared to pre-pandemic level, recovering from a low base. Leading projects have been adjusting their tenant mix and enhancing their market appeal which in turn drove moderate rent increases. Additionally, the stabilization of recently opened projects with lower starting rents over the past several quarters contributed to rent hikes across the market. The combined effect of these factors has driven continuous rent growth in Beijing's retail market by 0.9% q-o-q in Urban market and 1.8% in the Suburban. Despite four consecutive quarters of growth, rent levels in each submarket across the city remain 15% below their pre-pandemic levels, suggesting the market is still in the early stages of a steady recovery. “The market confidence in the leasing demand has improved as leading brands in multiple sectors including fashion and F&B announced their expansion plans in 2024. The robust demand is expected to be sufficient to absorb the substantial 932,100 sqm of new supply in the Suburban, where 94% of future supply is in 2H24 city-wide. Therefore, by end-2024, the Suburban vacancy rate is forecast to increase by only 0.2 ppts y-o-y, remaining at a relatively low level,” said Ji Ming, Research Director for JLL North China.
 

Stimulated by the continuous decline in rents, market transactions increased in the quarter. The number of market transactions edged up in the quarter. After several rounds of rent negotiations with tenants, landlords have offered more favourable leasing terms to facilitate the progress of their lease agreements. The main source of leasing demand was from tenants seeking cost-saving relocations in 2Q24. Pinggu submarket, with its price advantage, recorded more than 10,000 sqm of new leasing transactions.

Three new projects, with a total GFA of about 277,248 sqm, entered the market in 2Q24. Two of them were located in the Pinggu submarket. The Pinggu submarket witnessed its first large-scale supply surge in nearly a decade. Its total stock reached 430,000 sqm in 2Q24, making it the third largest major submarket in Beijing and ushering it into a phase of rapid development. Due to the influx of new supply, the overall vacancy rate increased by 5.3 percentage points to 15.8%.

The downward trend of overall rents continued, reporting -1.1% q-o-q growth and -2.4% y-o-y growth. Given a market environment of weak demand, landlords started to provide considerable rent discounts even for small-sized demand. The Pinggu submarket, recorded the highest downward rental adjustment amongst all submarkets in 2Q24. Since the rents of new projects in Pinggu were much lower than the market expectation, existing projects reduced rents significantly in the quarter to compete with new supply.

“The ongoing supply wave is expected to continue into 2024, further dragging on landlord sentiment,” said Mi Yang, Head of Research for JLL North China. “As low-priced projects in Pinggu gradually enter the market, landlords are expected to continue to provide rent reductions in a leasing market with rising competition. Overall rents are expected to fall by 4.0% in 2024.” The low-rent environment is expected to accelerate the relocation decisions of tenants and further stimulate those who do not have immediate leasing demands to make moves for cost-saving reasons. In particular, the Pinggu submarket, with its lower rents and high-quality warehouses, is expected to attract tenants that have previously relocated to Tianjin and Langfang back to Beijing.
 

_{Note: *Hotel refers to the upscale and above hotel market. *ADR stands for Average Daily Rate and includes service charges. *RevPAR stands for Revenue per Available Room.}

The Beijing upscale hotel market in 2024 H1 has performed positively compared to last year. By May 2023, the occupancy rate in Beijing's upscale hotel market reached 66.3%, with an ADR of CNY 1,073 and a RevPAR of CNY 712, representing a YoY increase of 7.0%. The positive performance of the upscale hotel market can be attributed to several factors including favourable visa-free policies that have stimulated international demand. In addition, major conferences and exhibitions have experienced a 17.6% year-on-year increase, further contributing to the growth.

However, the upscale market faces challenges due to corporate budget cuts and a consumption downgrade phenomenon. The trading performance of Beijing luxury hotels has exceeded that of 2019, while Beijing upscale hotels have recovered to 89.3% in the same period. The possible reason is that different income groups experienced K-shaped growth during the pandemic. After the pandemic, there was a divergence in consumption structure, with demand and prices for luxury hotels increasing. In comparison, the customer base of upscale hotels was affected by consumption downgrades.

The hotel market in Beijing is expected to witness the opening of two new upscale hotels in 2024. The Renaissance Beijing Haidian Hotel opened its doors in May 2024, and the anticipated opening of Mandarin Oriental Qianmen in September 2024 marks the Mandarin Oriental’s second hotel in Beijing. This trend reflects the characteristics of the stock era in the Chinese hotel market, where new supply growth is slow, and owners focus on revitalising existing assets, upgrading and renovating properties, and exploring new usage possibilities. Consequently, there has been an increased demand for hotel asset management and initiatives to enhance hotel quality and operational efficiency.

Tony Liang, Senior Vice President of JLL Greater China’s Hotel and Hospitality Group, said, “Visa policies and the upcoming peak summer travel season are expected to further stimulate demand. Prominent international conferences such as the Sibos (Swift International Banker’s Operation Seminar), exhibitions, and concerts also present valuable opportunities for the hotel industry. As the Beijing upscale hotel market evolves, various factors and challenges will influence its trajectory. However, the market is poised for continued growth and success with the right strategic approaches and a focus on meeting evolving customer demands.” 
 

Luxury apartment sales remain low. A total of 643 luxury apartment units were sold in the quarter, basically flat q-o-q but down 68.6% y-o-y. There was a strong wait-and-see attitude among buyers and supply shortfalls continued to suppress demand. Promotional pricing has become the main tool to stimulate sales. With the arrival of the mid-year sprint, developers increased discounts, driving capital value down 1.5% q-o-q. A divergence emerged among landlords in the Secondary market. Some landlords sold their properties at a reduced price to complete transactions quickly, but others changed their plans from selling to leasing. Increasing supply and soft demand in the leasing market drove rents down by 1.8% q-o-q.

More policies eased, but the market is still in need of repair. At the end of April, Beijing relaxed restrictions on home-buying outside the Fifth Ring Road, allowing eligible buyers to purchase one more home in this area. The policy boosted inquiries in the short-term. “As the city with the strictest purchase restrictions, Beijing is expected to optimise home-buying policies later this year to boost buyer confidence,” said Mi Yang, Head of Research for JLL North China. “It is expected that a promotions trend will continue during the market adjustment period. Pressure on prices will still exist in the near-term. The decrease in land transactions may see the continuation of limited high-end supply in the following year. Demand is expected to be transferred to the Secondary market, narrowing the decline in Secondary prices.”